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The One Thing You Must Know About Wells Fargo

Learn the most important metrics when evaluating a CEO.

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle to other categories of analysis. However, at Fool.com we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of Wells Fargo's (NYSE: WFC) leadership.

How much skin do they have in the game?Are Wells Fargo CEO John Stumpf's interests aligned with shareholders? Here's how the Wells Fargo CEO's ownership compares to that of other companies in the industry.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

John Stumpf, Wells Fargo

586,652

0.01%

$14

Richard Davis, US Bancorp

299,011

0.02%

$7

James Dimon, JPMorgan Chase

5,159,395

0.13%

$187

Brian Moynihan, Bank of America

453,727

0.00%

$6

Source: Capital IQ, a division of Standard & Poor's. Shares are common stock equivalents only and do not include options, awards, and other forms of compensation.

John Stumpf actually owns $14 million worth of Wells Fargo, or 0.01% of shares outstanding. We Fools prefer CEOs who have higher ownership stakes in their businesses, since that better aligns their interests with shareholders'. However, while we think high insider ownership is a good sign, low insider ownership isn't necessarily a bad one. CEOs may be relatively new, or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at Wells Fargo's recent return on equity:

Wells Fargo's current return on equity falls below its five-year average. While recent economic conditions have been challenging, declining return on equity shows either that management hasn't been able to control costs and manage assets, or that it has failed to move into higher-return businesses over the past five years. Relative to its peers, Wells Fargo has done a pretty good job of navigating the financial waters. ROE should remain lower across the financial industry versus the housing-inflated ROE highs of the middle of last decade.

How productive are their workers?Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Wells Fargo's revenue per employee has moved above its five-year average. Rising revenue per employee can suggest that management is getting better at controlling costs or encouraging more productivity from its workers. To better see whether Wells Fargo's management is excelling in this area, let's compare the company to its peer group once again:

Wells Fargo's revenue per employee isn't just rising -- it's better than its combined peer group. That's quite an impressive feat. The significant drop in 2008 came from massive provisions for loan losses which drove the company's revenue line down. After the post-crash consolidation, the company actually managed to boost its revenue per employee to levels greater than 2008, probably thanks to shedding some redundancies within its Wachovia unit.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.